Microsoft promises Nadella up to $18M for fiscal year 2015

Microsoft this week set Satya Nadella's annual base salary at $1.2 million, nearly twice his predecessor's but right on the average of CEOs in the technology industry, an executive compensation expert said today.

"His base salary is pretty much right on market," said Bob Buford, a Portland, Ore.-based compensation consultant. "If you look at their peer companies, those in technology average $1.2 million, while those in what they call the 'Dow 30' peer group is about $1.4 million."

The technology firms that Microsoft uses for compensation comparison purposes include Amazon, Apple, Dell, Google, IBM, Intel and others. The out-of-industry group includes American Express, Coca-Cola, ExxonMobil, Pfizer, Wal-Mart and 20 other American corporations, according to a filing with the U.S. Securities & Exchange commission last October.

"Microsoft is playing it safe, but certainly placing more emphasis on cash, but that's understandable for a guy who has far less equity than Ballmer," said Buford.

Former CEO Steve Ballmer's annual salary was $697,500, or 42% less than Nadella's. Ballmer, however, hardly needed the money, since he's one of the world's richest, with an estimated net worth of $15.2 billion, most of it in Microsoft stock, according to Forbes.

Nadella's previous salary as head of Microsoft's cloud-computing division was $669,167; he got a big bump -- a 79% increase -- with the promotion to CEO. His total compensation package for the 2015 fiscal year, which starts July 1, could be as much as $18 million, or 144% higher than the $7.6 million he received in fiscal 2013.

On Tuesday Microsoft named Nadella, 46, as its third-ever CEO, replacing Ballmer, who last year announced he would retire. Ballmer may not have been fired, but he was certainly pushed out, analysts have said, because he was either not unwilling or unable to accelerate changes at the Redmond, Wash. company. Microsoft faces an historic downturn in new PC sales and struggles in the now-booming mobile device and services markets.

Last year, Microsoft's board reduced Ballmer's bonus, citing the poor performance of Windows 8 and the $900 million Surface RT write-off. It was the second year running that the board paid Ballmer less than the maximum bonus he could have earned.

Like all the top executives at Microsoft, Nadella is eligible for a bonus. The bonus, paid in cash rather than stock, can be as high as 300% of his base salary, or $3.6 million in fiscal year 2015.

For the remainder of fiscal year 2014, Nadella would be paid up to three times as much as his CEO salary was between Feb. 4 and June 30.

The bulk of Nadella's $18 million compensation package for the 2015 fiscal year will come from a stock-based bonus. (Data: Microsoft.)

However, Nadella's biggest potential payout will come from stock grants. For fiscal 2015 -- and each year following -- he will receive stock worth about $13.2 million. At Wednesday's closing price, that amount would have purchased more than 368,000 shares.

Microsoft is also kicking in a one-time stock grant, dubbed "Long-Term Performance Stock Awards," or LTPSAs, that could hand him as many as 2.7 million shares over the next seven years. At Wednesday's closing price, that number of shares would be worth approximately $96.7 million.

Nadella may not receive the maximum LTPSAs, as the Microsoft board has tied them to Microsoft's "total shareholder return" (TSR) relative to the Standard & Poor 500's performance over three overlapping five-year periods.

TSR is a combination of share price appreciation and dividends paid to shareholders.

The better Microsoft's TSR performs compared to the S&P 500, the more shares vest for Nadella, with the maximum of 900,000 shares each of the three periods contingent on Microsoft being in the 90th percentile. He could, however, get nothing if Microsoft's TSR is in the cellar.

It's become common practice for boards to tie stock awards to the TSR, said Buford, who noted that such grants are often called "performance awards" because they reward market performance by a company and theoretically motivate CEOs to grow the company's revenue and make other moves that boost shareholder value.

The one thing that struck Buford in Microsoft's filings about Nadella's compensation was the vagueness of the criteria used to reward him with an annual cash bonus. "The lack of specifics to some of the performance metrics is unusual," said Buford.

In the filing with the SEC, Microsoft simply said that Nadella's bonus "will be based on your performance as evaluated by the Board."

"I'm pretty sure Ballmer had the same thing for his cash award, but there is nothing spelled out, which is unusual," Buford added. Most companies put the bonus criteria down in black and white.

Previously Microsoft dealt out large stock awards to other senior executives in an effort, it said, to hold onto them during and after the CEO selection process.

Last September, Microsoft handed out stock grants now worth about $63 million to eight executives -- including COO Kevin Turner and Tony Bates, who now leads business development and evangelism -- in a new retention program meant to keep those people at the company. Both Turner and Bates were reportedly considered for the CEO spot that Nadella eventually won.

Turner was awarded shares worth about $21.5 million at the stock's current price, while Bates was given about $8.1 million worth.

More interesting, however, was another filing last year that laid out new severance payouts for top-level leaders who are laid off as the company continues to reshuffle personnel, or who are pushed out by the new CEO. That plan also blocked the executives from taking jobs in other companies if they are let go.

Executives let go will receive severance equal to their annual base salary, as well as a prorated payment of their expected cash bonus. The stock grants set to vest in the next 12 months will also vest on a pro rata basis. The severance benefits come with some strings: The executive must promise to not disparage Microsoft and would be barred from working for competing companies for 12 months.

Buford had a simple explanation for the severance payments, which apply to an unknown number of Microsoft leaders.

"They're trying to pay some people to go away, with a reasonable amount of money, rather than have things linger for months or even years if someone contests their firing." " said Buford. "It's just another way to ease people out of the organization."

While Microsoft has not announced any top-tier executive departures since Tuesday, when Nadella was named CEO, it may: Nadella could clean house, sweep out some of the old and appoint new members to his team, according to experts in corporate strategy. They said such moves would come quickly, almost certainly in the first 100 days of Nadella's tenure.

"I haven't seen this that often," said Buford of Microsoft's retention and severance program. He named Intel, which changed its retention plan last year, as one the few examples that came to mind.

In 2013, Intel handed out stock bonuses worth $10 million each to a number of upper-level executives as an incentive to stick around for at least two years after the chip maker named Brian Krzanich as CEO, replacing the retiring Paul Otellini

Before he became CEO, Nadella owned 113,666 shares, with an on-paper value of about $4.1 million at today's price. He received a $1.5 million cash bonus for the fiscal year 2013, which ended June 1, 2013.

Copyright 2019 IDG Communications. ABN 14 001 592 650. All rights reserved. Reproduction in whole or in part in any form or medium without express written permission of IDG Communications is prohibited.